In the late 1800s, a group of independent oil producers in Pennsylvania came up with a radical idea to foil their nemesis, John D. Rockefeller. The Standard Oil baron had tied up the railroads, stopping his fledgling rivals from getting their oil to market. So, the landlocked independents teamed up to build the world’s first long-distance oil pipeline.

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Although their Tidewater pipeline was an engineering feat, it was ultimately futile as a competitive gambit. Before long, the irrepressible Rockefeller controlled Tidewater and almost every other U.S. pipeline, with a network from the Appalachian Basin to the Gulf of Mexico coast.

That would be the same coast to which Canada’s bitumen-bubbling oil producers are now desperate to pump their product through TransCanada’s proposed Keystone XL pipeline, the much-maligned conduit that threatens to launch a Canada-U.S. Cold War. If the oil companies can’t ship raw Canadian resources using that 150-year-old technology, they will rely on an even older one – rail. And if not rail, they might just float their bitumen on barges down the Mississippi.

Huckleberry Finn might have marvelled at this inventiveness, but it doesn’t quite cut it as a 21st-century national strategy for wealth creation. Yet our frantic obsession with exporting minimally processed bitumen is sucking up all the oxygen in the national conversation. Getting Alberta’s oil to market is “the most important economic issue” facing the country, says former federal cabinet minister Jim Prentice. There is “no more critical issue facing Canada today,” adds Enbridge chief executive Al Monaco.

In fact, the most critical issue facing Canada today may just be figuring out why we find ourselves in this situation. Raw resources can be a tremendous source of income, but they are volatile, and we’ve always known that overreliance on them is a recipe for economic stuntedness. As Bank of Canada Governor Mark Carney says: “Real wealth is built through innovation.”

Innovation is not wholly absent from Canada’s oil patch. But it’s hardly a first line of business. You’d think it would be a top priority, given the vexatious characteristics of Alberta bitumen, the oil sands’ distressing environmental footprint and the Canadian industry’s growing global image problem. Even in boom times, however, the Canadian oil and gas industry spends a piddling proportion of its revenues on research and development.

It could be that Barack Obama is only yanking our chain and has no intention of putting the kibosh on Keystone, in which case the bitumen bubble will have been nothing but Alison Redford’s bad dream. But even then, the celebration wouldn’t last long.

Last week, PricewaterhouseCoopers predicted that the coming boom in global shale oil production could slash the price of crude by $50 (U.S.) a barrel over the next two decades. “One effect will be to cut the need for expensive, environmentally destructive extraction techniques like the Arctic and tar sands,” the head of PwC’s oil and gas team told Reuters.

That would please those on Canada’s professional left. They believe that what’s bad for the oil sands would be good for unionized workers in Ontario, as if all that’s needed to revitalize Canadian manufacturing is for the loonie to lose its petro-dollar status.

But the real issue facing Ontario is its failure to make the shift from making low-tech goods to advanced manufacturing, the only kind that can support middle-class wages. Governments have showered the industry with tens of billions of dollars trying to make Canadian firms more innovative, to little avail. Cash-strapped and fed up, federal Finance Minister Jim Flaherty slashed R&D tax credits in last year’s budget. The result will be even less innovation, as domestic companies cut back and foreign-owned firms shift R&D elsewhere.

“Canada’s problem,” says Robert Atkinson, the author of Innovation Economics, “is that it’s not Germany, which has a much better engineering innovation system, and it’s not the U.S., which has a very good system of science-based entrepreneurship. You’re mediocre in both.”

One promising, albeit insufficient, proposal from a recent federally appointed panel is to make innovation capacity a top criterion in awarding defence contracts. Economic purists have dismissed the idea as industrial policy by another name. They’re wrong, and need only to cast an eye on the U.S. Defense Advanced Research Projects Agency to see how the pros do it.

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